Upbeat about the near-term, dubious on the longer-term
This is a quick post about the US economy. To put it simply, I am upbeat about what the near-term holds for the US economy. And I have lots of doubts about the longer term. But whereas I might have led with the doubts earlier in the year, as the year ends, I want to lead with the optimism.
Before I get into my ideas, I have to admit I haven’t written much in the second half of this year. That’s about to change as my goal is to put pen to paper multiple times a week. So look for a lot of content going forward.
On the optimism, think back to what I was saying in August: “If there is any change to my view, however, it is toward more optimism. When I look at the data coming out of the US on GDP growth, jobless claims, retail sales, non-farm payrolls, or what have you, all of it says the economic recovery will continue for the foreseeable future. None of it points to imminent recession. And in fact, if you look at the recent housing data, it points more to a mid-cycle pause than the end of cycle dynamics I tend to believe are at work.”
Here’s what I was saying and believe even more today. The year started off in a gloomy way. The data were middling to poor, risk assets were selling off and government bond yields were nose-diving as if there could be a recession at some point in the year. I went on recession watch. Mind you – my mantra has been that the data never indicated a recession was coming. But the inventory purge and the investment downturn were significant enough to show a sharp deceleration in non-farm payrolls growth and to cause rolling trend GDP growth to decelerate. In a nutshell, US trend growth was slowing so much that we couldn’t rule out a recession – and should have been actively prepared if one came.
But I think that’s over now. I am not on recession watch right now. We are seeing a re-acceleration of growth, against a backdrop in which both the inventory purge and the capex shortfalls have gone away. Oil prices have stabilized – and that takes a lot of tail risk from that sector off the table. In short, we are still in a sort of muddle through scenario of 2%ish growth – but now the risk is to the upside instead of the downside. This is an environment in which the Fed can hike rates without the domestic economy getting crushed. And I believe we should expect several interest rate hikes in 2017 as a baseline scenario as a result.
The real question is the medium to longer term. Over the medium-term, it is still an unanswered question whether we are near the end of this business cycle or just at the tail end of a mid-cycle pause. While I have always leaned toward the former answer, I have always believed it is an open question — and a key one for investors to answer regarding risk tolerance. Over the long-term, we have a lot of questions left regarding things like slow productivity growth, structural unemployment, and demographically-challenged consumption patterns. The whole business about secular stagnation cannot be dismissed out of hand regardless of what President-elect Trump says about 3.5% growth. To America’s credit, it has a less demographically-challenged population profile than, say, Japan, Germany, Italy, or Greece. But the challenges to consumption growth remain.
For now, I am looking to the near future with optimism though. The data are good. Tail risks are receding. I think, this is about as good as it’s going to get. Let’s enjoy it.